Monsanto Is Back From the Dead

Oh what a difference a year makes. Last year, Monsanto's (NYSE: MON  ) cash cow -- its herbicide Roundup -- was lying in the pasture half-dead. This year, it's still an old cow, but at least it's standing and producing a little milk.

Monsanto's strategy of not competing with cheap generic versions of Roundup on price seems to be working. In the third fiscal quarter, the agricultural productivity division, which includes Roundup, jumped 57%. The gross profit of $249 million in the third quarter is only a third of what the segment posted back in 2008, but it sure beats the loss on selling agricultural productivity items that the segment registered in the third quarter of last year.

While it's nice to see things turned around, investors shouldn't focus on the Roundup business. We're not likely to see that kind of growth, or maybe any growth, in Roundup next year.

The future of Monsanto is its seeds business, which posted solid gains of its own. Seed sales jumped 21% in the third quarter, but more importantly, gross profit for the segment was up 44%. That suggests that Monsanto has been able to command higher prices for its seeds. Part of the increase likely came from increases in crop prices; everyone from fertilizer maker PotashCorp (NYSE: POT  ) to equipment maker Deere (NYSE: DE  ) can raise prices when farmers are making more. But it also signals that the company's premium seeds, SmartStax, which combine multiple traits into a single seed, are taking off.

Monsanto has always maintained that the higher yields of the SmartStax seeds justify the cost, but it needs farmers to try out the new seeds to convince them that higher yields really can be had. With the first step of its two-step plan in place, Monsanto just needs the seeds to work their magic and produce higher yields to stay competitive with rivals DuPont (NYSE: DD  ) and Syngenta (NYSE: SYT  ) and continue growing into next year.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Syngenta. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 29, 2011, at 4:47 PM, funfundvierzig wrote:

    Monsanto, in contrast to the number two seed company, DuPont, is maintaining its leading edge in innovation. DuPont Pioneer peddles primarily cut-rate conventional seeds which appealed to many farmers last year when Monsanto jacked up its prices too highly on SmartStax.

    Monsanto's superior bio-technology will likely continue to enlarge its seed market share and enhance the value of MON shares.

    Merely the opinion of one individual retail investor...funfun..

  • Report this Comment On June 29, 2011, at 6:56 PM, Bkeepr100 wrote:

    With crop yield increases of btween 11 and 15 Bushels per acre on the SmartStax over the lower cost and lower yielding Pioneer seed, it does not take many acres to show an improvement for the farmer's bottom line. With this variety of SmartStax hybrids the farmer only needs to have a insect refuge area of 5% of the total corn planted to help fight insect resistance to the new traits, instead of the 20% needed for the older Roundup varities that DuPont sells. This means more of the highly productive product can be planted for better returns on the seed cost.

    The second reason that Monsanto will continue to take a lot of market share from DuPont is the new RIB bags of seed. (Refuge In a Bag) This newly approved mixture of both type of seeds also helps the farmer's bottom line and time saved as well. DuPont has a mix of 3 different bags that a farmer has to plant, almost a total of 25-30% refuge with their system. (In fact I have not heard any advertising for this Pioneer system this year, so it may be no longer in use.)

    The third reason is that I have personaly seen some of the new traits still in the pipes at some of the daughter companies of Monsanto. There are some new mind blowing varities to be released over the next decade or so. If you go to the right seed companies you can see them for yourself like the farmers do. One example would be drought resistant corn.

    Monsanto learned a very harsh lesson last year by raising the price of the new biotech way too much. When they lowered the price, the sales took off. The company has learned that lesson well.

    I am a farmer who has, in the past, used both companies products. I will not plant Pioneer corn anymore, it just doesn't have the yield potental that I like and need to keep profitable.

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